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Summary
- The USD Index (DXY) is about 0.75% lower over the past week, dropping with US yields after slightly softer US core CPI. The DXY is about 1.5% off its recent closing peak (which printed on 13 January).
- Amid a flurry of executive orders from President Donald Trump, the USD has this week closed at levels not seen since late last year.
- Momentum players and real money (RM) remain long the USD, which suggests still-crowded positioning.
Market Implications
- We think additional room exists for USD downside in the coming weeks.
DXY Has Pulled From Its Multi-Year High
After the strong run up in Q4 2024 into early January, outlined in our piece last week, the DXY has pulled back ~1.5% from its recent (closing) high near 110.
Even with Trump’s executive orders in the past few days, the DXY earlier this week closed at levels not seen since late 2024 (Chart 1).
Long USD Positioning Remains Stretched
Long USD positioning remains stretched despite this pullback.
This week’s Momentum report shows the extent that momentum players remain long USD across-the-board (Chart 2).
While this long positioning is slightly less extended than last week, but we think remains stretched.
When momentum players are uniformly long USD across the majors, we start to think an unwinding of these positions will occur sooner-rather-than-later.
Meanwhile, the most recent CFTC data shows RM is also very long USD, with DXY long futures positioning at multi-year highs (as outlined in this week’s Positioning and Sentiment Report) (Chart 3).
Momentum players and real money being very long makes us think bullish USD positioning is crowded.
DXY Technicals Are Still Neutral, but Not Oversold (Yet)
As last week, DXY technical are neutral.
Ideally, we would like to see crowded positioning above coupled with stretched technicals.
Using the 30/70 rule for Relative Strength Indices (RSIs), which we’ve discussed at length in previous research notes, the DXY RSI is currently at ~50, a neutral reading, between the 30 level (oversold) and 70 level (overbought) (Chart 4).
This neutral RSI reading makes aggressively selling USD harder to argue.
However, a further unwind of the RSIs nearer the oversold 30 level should take the USD lower, rendering the DXY downside trade still attractive on a tactical basis.